Paper trades are simulated trades. They look and feel like regular trades, but no real money changes hands between the trader and the broker. Investors utilize paper trading options to fine tune their tactics and strategies, in anticipation of real money trading. On the surface, it’s virtually impossible to distinguish between paper trading platforms and regular trading platforms. The biggest benefit of paper trading is the fact that you don’t need to risk a cent of your bankroll while you are learning to trade stocks, commodities, indices, or currencies.
The lessons learned from paper trading can certainly be extrapolated to real money trading situations. A caveat is in order: paper trades are stress free, but real money trades can be tense. The trade begins like any other. You pick a financial instrument to trade, go long or sell short, and wait for the trade to play out. It’s like playing a game of Monopoly – there are debits and credits in front of you, but at the end of the day you never lose any real money. Back in the old days, stock traders would read the business section of newspapers, with calculators and pencils in hand. Nowadays, all stock data, economic indicators, and breaking news is instantly available online. That’s why paper trading is done online at trading platforms.
The Pros and Cons of Paper Trading Online
To get started, traders are required to register for a virtual trading account. You will notice a specified balance in the account. That money is for paper trading purposes, and cannot be withdrawn. It’s always a good idea to choose a balance that mirrors your personal budget. That way, you enhance the realism of the trading activity. Needless to say, there are pros and cons of paper trading. The biggest pros include the fact that no real money changes hands, and you get to implement your chosen tactics and strategies under real-world trading conditions. If you succeed, you can take these skills to the real money trading arena.
There are disadvantages to paper trading. When you know that you’re not risking anything and not gaining anything – at least monetarily – paper trading isn’t necessarily the most exciting activity you can participate in. If you take money out of the equation, and consider paper trading as a means of gaining invaluable trading knowledge, you are already on a winning wicket. Without any emotion invested in the trade, you may not be as excited about paper trading but that’s okay. As long as the lessons learned from simulated trading can be implemented in real money trading, you’re already a richer trader.
Here are some benefits of paper trading:
- Paper trading allows you to put your knowledge to the test
- Paper trading mimics real-life trading with zero risk of loss
- Paper trading introduces you to the complexities of the financial markets
- Paper trading teaches you how to buy and sell financial instruments on a trading platform
How Does Paper Trading Differ from Real Money Trading?
The answer to that is in the question itself. Real money. But it’s more than that because paper trading isn’t real, you don’t have all the anxiety and anticipation of a real money trade. It’s sort of like swimming with inflatables, or riding a bicycle with training wheels. At some point, you know that you’re going to have to get out of your comfort zone and venture into the world of risk. There is an age-old expression that states: You have to risk money to make money. By taking calculated risks after you have mastered paper trading, it is certainly possible to profit from your knowledge.
Emotions often fly thick and fast when you are trading for real money. For some people it can’t be helped. When you risk scarce resources on financial instruments, trades can go either way. If you finish in the money, you’ll be pleased as punch. If you finish out of the money, you will likely feel disappointed. Take the lessons you have learned from paper trading and implement them under real-world conditions with regular trades.
Various paper trading simulators are readily available, including popular choices like Webull, E-TRADE, Robinhhood, and StocksToTrade. It’s always best to pick a user-friendly paper trading platform, because that encourages you to learn, explore, and trade more. The StocksToTrade paper trading account allows multiple user accounts, where you can modify the amount of capital in each user’s account. Traders can also alter the commissions structure between flat rate commissions and per-share commissions.
Final Notes: Paper Trading Checklist
- Pick trades that you’re likely to make with real money trading options
- Set a trading account limit similar to what you have available for trading purposes
- Keep a journal, or a trading diary to record and track your trading results, including entry/exit points, shares purchased, trade outcomes, et cetera.